Co-author Brittany Blakey
The takeaway from Hahn v. ConocoPhillips Company is that in Texas a NPRI holder may not diminish his rights by ratifying pooling of an oil and gas lease unless there are provisions explicitly purporting to do so.
Kenneth and brother George each owned ½ of the surface estate of a tract and ¼ of the mineral estate. Siblings and Charles owned the rest. Kenneth and George partitioned the tract into Tract A and Tract B. Kenneth sold his interest in Tract A to the Gipses, excepting ¾ of the minerals, which belonged to his three siblings, as well as this NPRI:
“ … a … [1/2] non-participating interest … (Same being an undivided [1/2] of [Kenneth’s 1/4] or an undivided [1/8] royalty)…”.
The Gipses entered into an oil and gas lease with Conoco, reserving a ¼ royalty. Conoco then pooled Tract A into the Maurer Unit B, which Kenneth ratified, and Kenneth and the Gipses executed a stipulation of their interests in Tract A, stating that “it was the intent of the parties in the deed from [Kenneth] to [the Gipses] . . . that the interest reserved was a one-eighth (1/8) ‘of royalty’ … .”
Kenneth then leased his ¼ interest in Tract B to Conoco, which was also pooled into the Maurer Unit B. Kenneth was advised by Conoco that it would “no longer be crediting him with his ¼ mineral interest in Tract B.” Based on the 2002 partition deeds, Conoco believed Kenneth conveyed all of his surface and mineral rights in Tract B to George, and George conveyed all of his surface and mineral rights in Tract A to Kenneth.
Kenneth sued the Gipses and Conoco to confirm his ownership in Tracts A and B. The Court of Appeals in 2015 determined that the parties had these interests:*
|Owner||Tract A||Tract B|
|George||0% surface or mineral interest||100% surface & ¼ mineral interest|
|Kenneth||0% surface and 1/8 fixed NPRI||0% surface and ¼ minerals|
|Gipses||100% surface, ¼ minerals less Kenneth’s 1/8 NPRI||0% surface or minerals|
After the case was remanded to the trial court a royalty calculation dispute arose. Conoco and Kenneth disagreed as to whether Kenneth’s NPRI should be reduced by the Gipses’ ¼ lessors’ royalty. Stated another way, Conoco argued that notwithstanding the court’s conclusion that Kenneth reserved a fixed 1/8 NPRI in Tract A, his ratification of the Gips lease transformed his fixed NPRI into a floating one. Therefore, said Conoco, Kenneth was to receive 1/8 × 1/4 of the royalties.
The appellate court disagreed. In Texas, pooling effects a cross-conveyance among the owners of minerals under the tracts of royalty or minerals in a pool so that they all own undivided interests under the unitized tract in the proportion their contribution bears to the unitized tract.”
Also, an executive lacks the power to pool a NPRI absent the NPRI owner’s consent, such as by ratification. If the NPRI owner ratifies, the lease effects a cross-conveyance of interests and a pooling of his or her royalty interests.
By ratifying the lease Kenneth agreed to nothing more than subjecting his fixed 1/8 NPRI to Tract A’s tract participation factor in Maurer Unit B. The court rejected Conoco’s assertion that Kenneth could not ratify the Gips lease for pooling purposes only, distinguishing prior Texas case law on ratifications and NPRIs.
The effect of Kenneth’s ratification of the Gips lease was only to bind him to the lease’s pooling provision. Therefore, Kenneth was due his fixed 1/8 royalty from Tract A.
For you trial lawyers, the court also addressed the “law of the case” doctrine.
*We ignore the other two siblings for this report.